Opinion
2:18-cv-00714-JAM-AC
10-25-2022
EDWARD ANDERSON, RAYMOND KEITH CORUM, JESSE AND COLLEEN WORTHINGTON, and JANET GORAL, individually and on behalf of all others similarly situated, Plaintiffs, v. EDWARD D. JONES & CO., L.P. SECURITIES LITIGATION, Defendant.
ORDER DENYING DEFENDANT'S MOTION TO DISMISS
JOHN A. MENDEZ, SENIOR UNITED STATES DISTRICT JUDGE.
The matter before the Court is Edward D. Jones & Co., L.P.'s (“Defendant”) motion to dismiss the third amended complaint (“TAC”) filed by Edward Anderson, Raymond Keith Corum, Colleen and Jesse Worthington, and Janet Goral (“Plaintiffs”). See Mot. to Dismiss (“Mot.”), ECF No. 83. Plaintiffs opposed the motion. See Opp'n, ECF No. 87. Defendant replied. See Reply, ECF No. 89.
For the reasons set forth below, this Court DENIES Defendant's motion to dismiss.
This motion was determined to be suitable for decision without oral argument. E.D. Cal. L.R. 230(g). The hearing was scheduled for September 13, 2022.
I. FACTUAL ALLEGATIONS AND PROCEDURAL BACKGROUND
Defendant is a Missouri Limited Partnership headquartered in St. Louis, Missouri that is dually registered as a broker-dealer and investment adviser under federal and state securities laws. TAC ¶ 37. Defendant provides these brokerage and investment services to individuals and small businesses. Id. Historically, Defendant has operated under a commission-based investment model, providing its clients with free financial advice and charging them fees upon a completed trade; clients also pay a small annual custodial fee. Id. ¶¶ 57-59. Plaintiffs allege that Defendant's commission-based model particularly benefitted middle-income investors in small communities who conducted little to no trading of their assets. Id. ¶ 59. In 2008 and 2016, Defendant expanded its investment options to include two fee-based programs, Advisory Solutions and then Guided Solutions. Id. ¶¶ 63, 75. Instead of charging clients on a per trade basis like the commission-based investment model, these fee-based programs charged a one to two percent annual fee of a client's assets under the account's management, along with a small administrative fee. Id. ¶ 63. Plaintiffs allege that between 2013 and 2018, they moved their commission-based accounts with Defendant to feebased accounts after Defendant's financial advisors recommended the fee-based programs to them. Id. ¶¶ 21-36. Plaintiffs allege that these recommendations were made as a part of Defendant's systematic transition of its business model from commission-based to fee-based investment programs; Defendant issued directives to its financial advisors to recommend its fee-based programs to all clients, regardless of their trading activity. Id. ¶¶ 64-65. Plaintiffs allege that Defendant did not properly supervise its financial advisors to confirm they were conducting suitability analyses to see if the fee-based programs were appropriate for their clients' accounts before making these recommendations to clients. Id. ¶ 78. Plaintiffs allege that their financial advisors did not conduct an account-type suitability analysis before making their recommendation to switch to a fee-based program, resulting in Plaintiffs paying higher fees than they would have had they remained in their commission-based accounts. Id. Plaintiffs further allege that Defendant's pivot to feebased programs has resulted in substantial profit increases for Defendant at Plaintiffs' expense. Id. ¶ 82.
Plaintiffs previously filed two amended complaints against Defendant, alleging violations of federal securities laws and state fiduciary duties; both were dismissed by the Court. See First Amend. Compl. (“FAC”), ECF No. 24; Second Amend. Compl. (“SAC”), ECF No. 47; July 8, 2019 Order (“First Order”), ECF No. 46; November 8, 2019 Order (“Second Order”), ECF No. 60. The Ninth Circuit reversed the dismissal of the SAC's breach of fiduciary duty claims under California and Missouri law. See Anderson v. Edward D. Jones & Co., L.P., 990 F.3d 692 (9th Cir. 2021), cert denied, 142 S.Ct. 745 (2022). This Court subsequently granted Defendant's renewed motion to dismiss with leave to amend with instructions, consistent with the Ninth Circuit's ruling, that Plaintiffs limit their pleading in the TAC to the failure to act theory of fiduciary breach laid out in their opposition brief. May 6, 2022 Order (“Third Order”) at 4 6, ECF No. 81.
On May 31, 2022, Plaintiffs filed the operative TAC, bringing a single cause of action under California and Missouri law for breach of fiduciary duty by Defendant. TAC ¶¶ 112-16. Defendant moves to dismiss the TAC under FRCP 15(a)(2) for exceeding the scope of leave granted and FRCP 12(b)(6) for failure to state a claim upon which relief can be granted. Mot. at 6-8. Plaintiffs oppose the motion. See Opp'n. Defendant replied. See Reply.
II. OPINION
A. Legal Standard
Under FRCP 15(a)(2), a party “may amend its pleading only with the opposing party's written consent or the court's leave. The court should freely give leave when justice so requires.” Fed.R.Civ.P. 15(a)(2).
In considering a motion to dismiss for failure to state a claim upon which relief can be granted under FRCP 12(b)(6), the Court must accept the allegations in the complaint as true and draw all reasonable inferences in favor of the Plaintiff. Moss v. U.S. Secret Serv., 572 F.3d 962, 969 (9th Cir. 2009) (citing Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)). The complaint must possess more than “a formulaic recitation of the elements of a cause of action;” it must contain non-conclusory, factual allegations sufficient “to raise a right to relief above the speculative level.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 554 (2007).
B. Analysis
1. Violation of the Court's Third Order
Defendant argues that Plaintiffs have violated the limiting instruction the Court imposed on Plaintiffs regarding their pleading in the TAC. Mot. at 6-7. Defendant argues that the Court stated in its Third Order that Plaintiffs had to limit their theory of liability in the TAC to one theory: that Defendant's failure to have its financial advisors conduct sustainability analyses-the fiduciary breach at issue-occurred at the first mention of Defendant's fee-based programs to Plaintiffs. Id. Instead, Plaintiffs are claiming that the failure to conduct a sustainability analysis occurred later, when the financial advisors recommended the fee-based programs to Plaintiffs. Id. at 7. Defendant contends that this temporal difference violates the limited leave granted to Plaintiffs to amend their pleading and constitutes a violation of FRCP 15(a)(2), warranting dismissal of the TAC. Id.
Plaintiffs argue that the TAC complies with the limiting instructions in the Court's Third Order and is consistent with both Plaintiff's argument in its prior opposing motion and the Ninth Circuit's holding in Anderson. Opp'n at 4. The Court agrees.
The Court finds that Plaintiffs have not violated FRCP 15(a)(2). The Court's language in the limiting instruction in its Third Order was in reference to the Ninth's Circuit's holding in Anderson and the Court defers to the Ninth Circuit's interpretation of Plaintiff's theory of fiduciary liability. See Anderson, 990 F.3d at 707 (“Once Edward Jones allegedly failed to conduct a suitability analysis, and made a recommendation without that analysis, causing Plaintiffs to switch accounts, the breach of fiduciary duty would be complete.”) (emphasis added).
2. Failure to State a Claim
Defendant argues that Plaintiffs have failed to state a claim under FRCP 12(b)(6) for breach of fiduciary duty. Mot. at 8. Under California and Missouri state law, the elements of breach of fiduciary duty are (1) the existence of a fiduciary relationship, (2) a breach, and (3) damage proximately caused by the breach. Brown v. California Pension Administrators & Consultants, Inc., 45 Cal.App.4th 333, 347-48 (1996); Zakibe v. Ahrens & McCarron, Inc., 28 S.W.3d 373, 381 (Mo.Ct.App. 2000) .
The Court finds that Plaintiffs have alleged sufficient facts to support their state law claim of breach of fiduciary duty under a failure to act theory. In considering Defendant's motion, the Court must accept the allegations in the TAC as true and draw all reasonable inferences in favor of Plaintiffs. Iqbal, 556 U.S. at 678.
As to the first element, the existence of a fiduciary duty, Defendant claims that there is no applicable fiduciary duty under state law or the financial regulatory rules. Id. at 8-12. However, Plaintiffs have properly alleged in their TAC that Defendant, in its capacity as a broker-dealer of Plaintiff's investment assets, was a fiduciary with respect to recommendations about investments and which accounts Plaintiffs should utilize. TAC ¶ 113. Defendant does not contest this assertion, which is also consistent with California and Missouri case law on the existence of a fiduciary relationship between stockbrokers and investors. See Walsh v. Hooker and Fay, 28 Cal.Rptr. 16, 18 (Cal.App. 1963), State ex rel. PaineWebber, Inc. v. Voorhees, 891 S.W.2d 126, 130 (Mo.,1995).
Defendant then argues that Plaintiffs have failed to allege facts sufficient to support the second element of breach of a fiduciary duty. Mot. at 12-14. However, in light of the Ninth Circuit's holding in Anderson, the Court finds this argument unpersuasive. The Ninth Circuit in Anderson held that there would be a breach of fiduciary duty if Defendant “failed to conduct a suitability analysis, and made a recommendation without that analysis, causing Plaintiffs to switch accounts.” Anderson, 990 F.3d at 707. This holding is consistent with Plaintiffs' argument that Defendant's failure to conduct suitability analyses before making its recommendations of its fee-based programs could not be delegated or disclosed away. Opp'n at 9, 11-12. Therefore, Plaintiff's allegation of breach is adequately plead.
As to the element of proximate damages, Plaintiffs have plausibly pled their damages-in the form of improper and excessive account fees-were proximately caused by Defendant's breach of fiduciary duty. Id. at 13-14. This is sufficient to allege Defendant's conduct proximately caused Plaintiffs to suffer damages for which Plaintiffs may be entitled to restitution. See Depot, Inc. v. Caring for Montanans, Inc., 915 F.3d 643, 663-64, n.15 (9th Cir. 2019).
Accordingly, finding that Plaintiffs have sufficiently pled all elements for a breach of fiduciary claim, the Court denies Defendant's motion to dismiss under Rule 12(b)(6).
III. ORDER
For the reasons set forth above, the Court DENIES Defendant's motion to dismiss. Defendant shall file its answer to the TAC within twenty days of this Order.
IT IS SO ORDERED.